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Dufil Prima Foods COO: ‘Nigeria’s Regulators Need to Streamline Bond Compliance Process’

Dufil Prima Foods COO: ‘Nigeria’s Regulators Need to Streamline Bond Compliance Process’

Nigerian regulators have made progress on managing the country’s challenging FX situation and narrowing the gap between official and black-market currency exchange rates, giving a much-needed boost to investor confidence. Madhukar Khetan, COO, of Dufil Prima Foods, which is lining up its debut bond issuance after nearly a year of planning, says the government now needs to tackle the regulatory compliance process associated with issuing if it is to have any hope of jolting the country’s capital markets back to life.

Q. Can you give us a sense of Dufil Prima Foods’ main strategic objectives this year? Where is the company looking to expand its footprint?

A. At the beginning of this year we set two primary objectives for ourselves. The first objective was to bring our market share in the noodle business to more than 80%, and the second objective set at the beginning of the year was to maintain the supply chain. At the beginning of the year the economy and businesses like ours were significantly impacted by the FX challenges in Nigeria, which had a huge impact on companies’ ability to source certain raw materials. Within that context, simply maintaining our supply chain was a particular challenge. We are on target with both of these objectives, and we have already secured the required raw materials either in stock or transit so that we maintain our required raw materials throughout the year. About 60% of our raw materials are imported from sources outside Nigeria.

We are currently exploring the possibility of expanding into Ghana, and we are also exploring expansion into Western Africa more broadly. At the same time, because of the FX situation, we have started looking further afield for commodity export markets, particularly in far East Asia, which will ensure we can also secure foreign currencies that we can also use to support our imports strategy.

Q. That said, how have some of the challenges seen in the Nigerian economy affected Dufil’s funding strategy and outlook? To what extent has the country’s challenges – and the particular challenges faced by importers – influenced investor sentiment towards Dufil?

A. After seeing how the economy was fairing in 2016, we had already made a number of adjustments to our funding strategy in order to get ahead of some of the challenges we anticipated would evolve. We are currently very bullish about the Nigerian economy – despite some of the very real challenges that are still present – and we anticipate a turnaround sometime in early 2018; with this in mind we are actually anticipating a CAPEX expansion in order to ensure we can continue expanding our manufacturing operations in a number of locations.

That said, one of the key challenges has been to secure new funding at competitive pricing from banks, in part due to the availability but also due to liquidity. One of the things we’ve had to do in order to get in front of this, given our CAPEX expansion, supply chain and market share goals, was to take out a term loan before the funding was really needed so we could lock in comparatively lower interest rates and secure our supply chain. But there’s a cost attributed to taking on additional debt earlier than needed, of course.

Given our longstanding presence in the market, I wouldn’t say that investor sentiment has changed that much, nor has the tone of our dialogue with investors. We grew more than 20% last year in despite the challenges seen in the market, and we are anticipating growth of between 40-50% this year. 

Q. Earlier this year the Nigerian Central Bank eased FX controls to the delight of many importers, but many would argue the Bank has not eased nearly enough. Where do you stand on this? Has this easing of FX controls had a positive influence on Dufil’s business?

A. I think the regulators along with the Central Bank are actually doing a tremendous job in containing the FX situation and ensuring it doesn’t spiral out of control, and they are making progress on narrowing the gap between the official and black-market exchange rates. Coupled with the government’s ambitious reform plans, we feel like investor confidence in Nigeria has increased in recent months as a result, which has in turn increased business confidence. Certain parts of our supply chain do rely on foreign currencies, particularly US dollars, and with the new FX windows established by the Central Bank we still have access to most of the foreign currencies we need to continue operating as usual. What we have noticed, however, is that the supply of currencies made available in these windows has decreased and as a result of this, it takes longer to secure the necessary currencies, which could influence our business – and the wider economy for importers – going forward.

Q. The company recently acquired Dangote’s noodle-manufacturing assets, further cementing Dufil’s lead in the segment. What were some of the main drivers behind the move and how was the transaction financed?

A. This was largely driven by our core strategy of increasing market share, and given this area is our core competency – we have been investing in this market for over three decades – we wanted to ensure that we can continue to deliver high quality products in the market. The move was in line with our strategy to increase our market share in the noodle segment to more than 80%. The transaction was financed exclusively by a term loan provided by a commercial lender, so entirely debt-funded.

Q. Dufil Prima Foods recently announced its intention to issue up to NGN40bn in the local capital markets, a transaction that, as I understand it, is coming after over a year of preparation. What were some of the main challenges in bringing this transaction to market? How did the company and deal stakeholders overcome those challenges?

A. We have raised NGN2bn through the issuance of short-term commercial paper in the past, and have secured approvals from the Securities and Exchange Commission for another NGN2bn, but the NGN40bn deal is the first bond transaction being undertaken by the company. We originally began preparing for this issuance in September 2016, which is when we began preparing the necessary documentation and began engaging regulators. Regulatory approval took a very long time, more time than we had anticipated, in part because it took regulators a very long time to assess all of the documentation from the various parties involved with the transaction. In our view, this needs to be streamlined much better in order to allow the market to develop further. The process needs to be simplified for issuers and borrowers, and more guidance on compliance throughout the documentation process needs to be provided by regulators. We also feel that it would be better to create and ensure the conditions of compliance apply to multiple issuances in order to make the process more flexible for potential borrowers – for instance, to draw on our own example, by creating a process that would allow us to secure pre-approval for forthcoming issuances through certifying compliance on our commercial paper programme. It would make borrowers more agile when tapping the market.


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